Commodity Wrap - Oil, Gold, Natural Gas, Corn (29.06.2021)

Oil

• Oil trades at elevated levels ahead of OPEC+ decision

• It is expected that OPEC+ will make decision on output in August as current agreement expires at the end of July

• Base case scenario is that OPEC+ will meet monthly and make output decisions. Market expects production to be increase by 550k bpd in August

• India expects oil demand to return to pre-pandemic levels by the end of the year

• Current OPEC forecasts suggest that deficit in Q4 may be as big as 2m bpd. Should OPEC+ leave output unchanged, deficit in August could reach 1.5 million barrels

Oil prices sit near $60 per barrel at the longer end of the futures curve. $70 per barrel is the current quote for April 2022 contracts. Futures curve is relatively flat but not as flat as it was 6 months ago. Source: Bloomberg

Oil inventories remain below average. However, it is mostly a result of OPEC+ policy that is currently key for the oil market. OPEC+ could push prices towards $100 per barrel but steep drop could follow as global supply adjusts. OPEC+ has a lot of spare production capacity. Source: xCommodity Context

A pullback from $75 area can be observed on Brent (OIL) chart. OPEC+ decision to increase output is already priced -in. In case OPEC+ decides not to increase production (an unlikely option), oil price may target $90-100 over a 6-9 month horizon. Source: xStation5

Gold

• Gold prices struggles to break back above $1,800 per ounce

• USD is likely to be a key factor for gold in the short-term as the situation in the bond market stabilized. Upcoming NFP report on Friday is a near-term event to watch

• Should QE taper talks begin for good, gold price may be negatively impacted, as it was the case in 2013. On the other hand, performance of USD and yields in such a scenario will be key. Back in 2013, yields had bigger impact on gold than USD

ETFs remain active. Reduction in the number of open long speculative positions. Source: Bloomberg

Situation in the bond market stabilized and gold became more dependent on USD performance. Gold price struggles with breaking back above the $1,800 area, hinting that bulls may be running out of steam. Seasonal patterns do not hint that any price rebound is coming. Source: xStation5

Gold may be negatively impacted if taper talks begin for good. However, back in 2013, yields were the main drivers of gold performance during taper tantrum. A point to note is that monetary policy is much more expansive than it was 8 years ago. Source: xStation5

Natural Gas

• Natural gas prices has surged recently

• Natural gas stockpiles sit below 5-year average

• Significant increase in demand around the world. Stockpiles in Europe at multi-year lows

• Current situation starts to resemble the one from 2016. Should history repeat, a correction could occur soon. However, afterwards price gains would continue until November

• Futures curve is in strong backwardation, just like on other commodity markets

Natural gas stockpiles sit below the 5-year average. Source: EIA

Situation on the natural gas chart starts to resemble the one from 2016. It is uncommon for natural gas prices to rise so steeply during the first half of the year. Source: xStation5

Corn

• Record backwardation on the corn market suggest very strong short-term demand, what is also supported by seasonal patterns

• Seasonal patterns result from the fact that the amount of corn available will increase during harvest in autumn. Stockpiles sit at extremely low levels currently. Situation may lead to continuation of steep upward move if combined with potentially increased orders in near-term

• On the other hand, the ruling of the US Supreme Court can be seen as a blow to corn. Small refineries are no longer obliged to blend biofuels in gasoline, signalling a potentially lower demand for corn for biofuel production

• Recent rainfalls in the US "Corn Belt" alleviate concerns over size of harvest

• Final report on quarterly sowings will be released on June 30. It is expected to show large acreage for corn and soybean and therefore may puts some pressure on prices

Massive backwardation on the corn market. As one can see, investors' expectations are rather stable until the end of the current season (May 2022). Source: Bloomberg

CORN trades at relatively low levels due to a recent contract rollover. The latest sell-off has been fueled by concerns that demand from biofuel producers will be lower. Key level to watch for now is the support at 550 cents per bushel. Source: xStation5